Educational Articles

This Miner Is Outshining Many Equities In The Metals Realm

Dominic B. Silva
| February 12, 2014

Stillwater Mining (SWC) is engaged in the development, extraction, and processing of palladium, platinum and other PGM metals, as well as the recycling of catalytic converters. Its primary asset is the J-M Reef, the only known source of PGMs inside the U.S. and one of the most significant resources outside South Africa and Russia. In anticipation of strong long-term market fundamentals, management announced two new development and potential expansion projects. Once work at the Blitz and Graham Creek plays is completed (within the next five years), output should advance sharply.

Stillwater Mining has appointed Michael McMullen as its new CEO. Mr. McMullen joined the company’s board of directors earlier this year after an activist investor successfully forced the addition of new members. The Clinton Group became disenchanted with the miner’s strategic direction, with capital spending and its acquisitions/investments being the root cause of concern. Subsequently, the new appointees convinced management to initiate an internal process aimed at boosting shareholder value. Under Mr. McMullen, shareholder interest ought to take precedence. Moreover, the ongoing evaluation has the potential to result in lower levels of spending, and asset disposal or development through partnerships.

Given an emphasis on capital preservation, this entity could possibly seek a partner for the Altar project, a play located in Argentina containing large copper and gold deposits. Broad weakness in commodities have materially brought down prices of these metals, and the prospects of further reductions in the Federal Reserve’s quantitative easing program suggest this weakness will continue. Moreover, this sluggishness provides a disincentive to continue investing in the Altar project. To make matters worse, recently-implemented regulations in this South American country are leading to soaring mining costs.

Although commodity markets have cooled recently, platinum and palladium prices have held up relatively well. This is primarily due to relatively strong palladium markets. The average combined realized price on mined palladium and platinum was $887 per ounce in the third quarter, compared to $805 an ounce in the year-earlier period. Historically, rising interest rates have put downward pressure on precious metal prices, as they become less attractive to investors relative to other interest-bearing investments. However, an improving economy is resulting in increased industrial demand for palladium and platinum.

Both metals appear to have bright futures. Platinum’s outlook is especially encouraging. It is highly efficient in safely processing carbon monoxide and hydrocarbons, making platinum desirable for diesel applications. For gasoline-powered engines, palladium and platinum are equally effective. However, since the former is trading at a sharp discount, it is gaining momentum. Nonetheless, palladium’s supply appears to be restricted. Russia, which historically accounted for more than half of the metal’s output, has curtailed overall supplies. There are reports that the country has either depleted the metal or is conserving it for future usage.

Meanwhile, stricter emissions regulations in the developed world and growing disposable incomes in emerging countries, are boosting automobile sales, which are in turn leading to increased demand for catalytic converters. Despite a break-neck pace of vehicle purchases in China during the last two decades, there appears to be room for additional growth. In the world’s most populous country, there are less than 100 automobiles per 1,000 people. In comparison, there are more than 400 automobiles per 1,000 consumers in Europe and the United States. The same metric is even lower in emerging countries, leading us to expect brighter days ahead for the auto industry.

At the time of the article’s writing, the author did not have positions in any of the companies mentioned.